Rights of the Borrower under SARFAESI Act-2002

By Legal Cell

The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions there are few provisions giving a right to the borrowers to submit their version.

Important Definitions

“Borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;

“Secured Creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes-

(i) debenture trustee appointed by any bank or financial institution; or

(ii) securitisation company or reconstruction company; or

(iii) any other trustee holding securities on behalf of a bank or financial institution; in whose favour security interest is created for due repayment by any borrower of any financial assistance;

“Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to assets classifications issued by the Reserve Bank;

“Secured Asset” means the property on which security interest is created;

“Security Agreement” means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

The Borrower always face lot of problems when he takes loan from any Bank, or financial institution. If any disputes arises between borrower and Bank or financial institution the borrower approaches a professional asking for lagal advice, the professional may not be in a position to give clear suggestion to the borrowers.

It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 i.e Right to appeal under the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal on the request made by the borrower. If Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.

The usual grounds of an appeal under section 17 of the Act can be as follows:

1. If there is error by Bank in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request.
2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.
3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.
4. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.
5. If the Borrower has not received any notice under section 13 (2) of the Act by the Bank and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it.
6. The Auction process is unfair and illegal.
7. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act.
8. The Bank has failed to proceed against the borrower and instead harassing the guarantor.
9. If the Bank illegally proceed against the property of the guarantor without proceeding against the borrower first.
10. If there was no ‘valid mortgage’ with the Bank at all.
11. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.

No purpose will be served by filing an appeal mechanically unless the intention of the borrower is bonafide and unless there is arguable case against the Bank. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank.

It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers.

Sometimes the borrowers/guarantors and public get troubled with this recovery system. It is true that every borrower has to pay money to the Bank or financial institution which is taken as a loan but under a recovery proceeding against the borrower there is a law and if the borrower raises a considerable legal point, the same is to be considered.

Section 13 (2)

Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). The Madras High Court in W.P.No.6710 of 2011 reported in CDJ 2011 MHC 4916, it was held that notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The said notice is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act.

Under Sec.17 any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may prefer an appeal to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken.

In one another case Mardia Chemicals Ltd., and others v. Union of India and others, wherein the Supreme Court held as follows:

It must be consider as to what forums or remedies are available to the borrower to ventilate his grievance. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act.

The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act. The Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings.

The Suprem Court further held that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act. In the said case two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers.

Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), in Transcorev. Union of India and another, wherein the Supreme Court has held that the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand.

The SARFAESI Act made for speedy recovery of the debts to the Banks and Financial Institutions. Section 13(3-A) is one such provision which mandates consideration of their objections. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.